Here’s the state of the market on the 1-year anniversary of China’s yuan devaluation

We take a look back at the selloff that followed—and how far global markets have come

Reuters

It’s been a year since China devalued the yuan.

By

JosephAdinolfi

Markets reporter

U.S. stocks have come a long way in a year.

Last August, the global markets experienced one of the sharpest selloffs since the financial crisis after China’s central bank engineered a surprise 2% devaluation of its currency, the yuan, on Aug. 11, 2015. The stunning implosion, which resulted in a stock-market rout in late August, led some strategists to declare the death of the six-year bull market in equities.

The initial reaction was relatively tame. The S&P 500 dropped 0.9% on Aug. 11 as investors mostly shrugged off the China move. Since the beginning of 2012, the yuan had appreciated sharply against most of its trading partners as it followed the dollar higher.

But in the days that followed, uneasiness intensified into panic. Investors feared that a weaker yuan would dampen global trade as China—the world’s largest import market and second-largest economy—struggled with diminished purchasing power.

Worse yet, the market fretted that devaluation would lead to an outright currency war, as other major exporters moved to protect their global market share.

Eventually, these fears helped turn global markets on their heads. On Aug. 24, The Dow Jones Industrial Average suffered a 1,000 point drop, its worst since 2008. The dollar clambered lower, shares in Europe and Asia tanked.

Meanwhile, Treasury yields, which move inversely to prices, tumbled.

Fast forward to today and stocks are trading at or near all-time highs, despite the U.K.’s vote to leave the European Union, which many economists warned could provoke turmoil in international financial markets. Against that backdrop, expectations have grown that the world’s largest central banks will maintain artificially low monetary conditions for the foreseeable future, propping up asset values.

Below, we take a look at how these assets have performed in the year since the devaluation.

The yuan

In the year since the devaluation, global markets have apparently grown more comfortable with the idea of a weaker yuan.

Though there hasn’t been another one-off devaluation like the one seen a year ago, the currency has steadily weakened against most of its rivals.

The dollar has risen 5% against the yuan
USDCNY, +0.0000%
since the devaluation, trading at 6.64 yuan to the dollar on Thursday, compared with 6.23 to the dollar a year ago.

But against some if its trading partners, the yuan’s weakness is even more pronounced. In the past year, the yuan
CNYJPY, -0.0273%
has slid 23% against the Japanese yen.

Many, including a team of global rates and currencies strategists at Bank of America and hedge-fund manager Kyle Bass, expect the currency to weaken further. The Bank of America team says investors shouldn’t ignore the role that the relatively weak U.S. dollar in all of this. If the Fed raises rates in December, they expect the Chinese currency to soften.

U.S. stocks

Worries that an economic catastrophe in China could take down the global economy have largely abated. And the expectation that central banks will keep the liquidity taps open has helped push U.S. stocks to records.

The Dow Jones Industrial Average
DJIA, +1.38%
has risen nearly 20% from the lows reached on Aug. 25, 2015. The blue-chip gauge reached an all-time intraday high of 18,633 on Thursday.

The S&P 500 index
SPX, +1.32%
is up 17% since last August, having reached an all-time high of 2,187.66 Aug. 9, 2016.

Chinese shares

Chinese stocks
SHCOMP, +0.56%
have struggled so far this year as the country’s economy has continued to cool. Index provider MSCI’s decision in June not to include stocks listed in mainland China—known as A shares—in its emerging-markets index this year, which hurt valuations.

Billions of dollars of global assets are gauged against the MSCI index, and inclusion likely would have flooded Chinese markets with fresh international capital.

The country’s benchmark Shanghai Composite Index is down nearly 24% in the last year, and down more than 40% since reaching a postcrisis high in May 2015.

Treasury yields

Record-low interest rates in Europe and Japan have pushed foreign investors into U.S. Treasurys, depressing yields even as U.S. stocks have rallied to record highs. The yield on the 10-year Treasury sunk to a record low of 1.366% in July.

On Thursday, the 10-year yielded 1.531%
TMUBMUSD10Y, +0.00%
A year ago, the yield was 2.142%, representing a drop of more than 60 basis points since that time.

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